The move comes following concerns about the costs of implementation and attempts to simplify transition requirements.

For lessors, it provides a practical approach for the separation of non-lease from lease components, following calls from preparers of financial statements to simplify implementation of the standard.

FASB stated that ‘as entities have started to implement the new leases standard, many preparers have cited their plan to implement new systems and are observing some unanticipated costs and complexities associated with the modified retrospective transition method, particularly the comparative period reporting requirements previously described. Accordingly, those preparers requested that the Board provide an additional (and optional) transition method’.

As a result of feedback, the FASB has decided to provide another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date (such as 1 January 2019, for calendar year-end public business entities) and recognise a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with preparers’ requests.

Specifically, the ASU provides:

• an option to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements; and
• a practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are met.

‘The targeted improvements in the ASU address areas our stakeholders identified as sources of unnecessary cost or complexity in the leases standard,’ stated FASB chairman Russell G Golden. 

‘They represent the FASB’s commitment to proactively address implementation issues raised by our stakeholders to ensure a successful transition to the new standard without compromising the quality of information provided to investors.’

This standard was developed alongside the International Accounting Standards Board (IASB), which released IFRS 16 Leases standard, which comes into force for accounting periods from 1 January 2019. Since release of the standard the US and international standard has somewhat diverged with both boards taking different approaches to implementation.

FASB Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) issued 30 July 2018

Report by Sara White